Greece: The End of The Road?

It looks like the end of the Greek drama is rapidly approaching. Reuters quoted Greek finance officials as saying that the country will need to tap all the remaining cash reserves across its public sector — a total of EUR 2bn — to pay civil service wages and pensions at the end of the month. That leaves no money to repay the IMF or refinance maturing T-bills in May.

Over the weekend, senior European officials said that while the Greek debt situation was dire, they still believed an agreement would be reached, according to the New York Times (NYT). However, it was hard to see the outlines of that agreement even now. “We still do not have a comprehensive, detailed plan,” one of Greece’s senior-most creditors said. “Plus, the numbers just don’t add up.”

The markets were reassured a few weeks ago when Finance Minister Varoufakis flew to Washington to meet with IMF President Lagarde. At that time he said publicly that Greece intended to meet its obligations. The statement was taken as a commitment by Greece to do whatever it takes to pay the IMF and thereby avoid an official default. The NYT reported that privately, however, Mr. Varoufakis told colleagues in Washington that he purposely used the word “intend” instead of “will,” meaning that it is possible that they might not pay.

Greece’s deputy prime minister Yiannis Dragasakis Sunday refused to rule out the possibility of new elections or a referendum if talks with its creditors remained deadlocked. Personally, I think this looks like the most likely result. The administration is trapped in a “impossible trinity” in which it is trying to do three things, only two of which are possible: renegotiate the debt, remain in the euro and stay in office. The only way out that I can see is to put together a proposal that will meet the requirements of the creditors, take it to the voters, and ask them which do you prefer: this or leave the euro?

According to the Greek newspaper Kathimerini, “At this point, the administration looks as if it is trying to buy more time for negotiations by mobilizing all available resources. Some say the goal may be to include the pending reforms in a new, more attractive agreement, containing debt relief measures. The government could take this deal to the people via a referendum or even call new elections. All in all, the government’s strategy is not clear to the market and others.”

In any event, it’s clear that the Greek problems are starting to impact other markets. The DAX was down 2.6% on Friday as Greek bank stocks continued their collapse. These stocks were not so high before and they lost about 20% last week alone! The problem is the large decline in Greek domestic bank deposits (down EUR 25.4bn or 14.3% in the last three months) has in effect been funded by the other central banks of the Eurozone through the ECB’s payment system and shows up as a growing asset on their balance sheets. That asset will have to be written down if Greece leaves the Eurozone, in addition to the ECB’s shared exposure to Greek bonds. In other words, there definitely would be repercussions across the Eurozone. I expect the Greek problem to be one of the main themes in financial markets this week.